In support of NHBC’s purpose to raise standards in house building Charlie Ash, sector lead – housing associations, joined a panel at the Social Housing Annual Conference in November to discuss approaches to managing contractor and supply chain risk in the wake of economic uncertainty
The session explored the multitude of challenges facing Registered Providers (RPs) and how they might understand and mitigate contractor and supply chain risk around potential contractor insolvency.
Understanding contractor and supply chain risk
2023 was another demanding year for construction across the UK and contractors and their supply chains are experiencing pressure in several areas.
Whether it is issues arising from labour shortages, material scarcities or the ongoing concern around inflation, the first step in mitigating any risks is through the investigation and understanding of them and the impact they could have on an organisation.
Labour and skills shortages
In January 2023, the Construction Skills Network Industry Outlook highlighted the need for an additional 225,000 construction workers in the UK by 2027.
That is a requirement for 45,000 per year, a demanding number against a backdrop of training and recruitment challenges across the industry.
In addition to these significant figures, the number of open vacancies in construction trades is rising, having reached 140,000 in July 2023, with builders, electricians and plumbers all in high demand.
So, having faced labour and skills shortages throughout the past year, it is likely this challenge will continue in 2024 and even beyond.
Material shortages
The combined impact of Brexit and the Covid-19 pandemic has led to unprecedented materials shortages within the UK construction sector. However, in more positive news, the Construction Leadership Council have suggested the availability of many materials, including bricks, blocks and timber products may finally be returning to pre-Covid levels.
Inflation
Between 1997 and 2020, Consumer Prices Index (CPI) inflation was an average of 2%. As many businesses are all too aware, it started to rise rapidly in 2021 and reached a peak of 11% in 2022.
It fell in 2023 but may not reach what the Bank of England termed “more normal levels” of around 2% again until the end of 2025.
This means that although the construction industry, like many others, has navigated what are strongly hoped to be the worst challenges of inflation, there are still concerns about the current rate and a return to normality remains at least 18 months away.
Mitigating contractor and supply chain risk
The decision to accept, transfer or manage risk is a difficult one and will vary across organisations according to several immediate factors, the long-term strategy and, of course, the appetite for risk.
In order to decide what amount of risk, if any, an organisation is willing to accept it is essential to have a clear understanding of the risk profile and implement the active monitoring and effective management of each potential hazard.
One increasingly popular option for organisations in the face of greater economic instability is a move away from the prominence of a “just in time” supply chain towards a “just in case” supply chain – as the name suggest this involves keeping higher stock levels.
This helps organisations be better prepared for economic shocks, although there is an unavoidable cost to locking a greater amount of capital in stock and storage space.
Expanding the number of suppliers within the supply chain may also be an option for some organisations to spread risk. Where previously a higher volume with a single supplier might secure lower costs, there can be a benefit to placing business with more than one supplier; for example, this would avoid an overdependence on a single production facility or geographical location.
There is also an opportunity for organisations to work with suppliers to include a cost escalation clause in future contracts so that if certain conditions change, a pre-agreed automatic increase can be implemented, potentially sharing expenses if they rise wildly and thus sharing risk.
Organisations are also trying to lower risk through investment in technology. For example, by automating supply orders linked to stock levels not only can organisations increase ordering accuracy and save money but can also release time and resources to focus on more complex challenges within the business or generate additional market intelligence.
Rebuilding market confidence
According to the Department for Business & Trade, the construction sector has a turnover of £370bn and is one of the largest sectors in the UK, economy employing 3.1m people. House building activity is also a significant indicator of the health of the UK economy and, despite the challenging economic conditions of the last few years, the sector is fundamentally sound.
The Regulator of Social Housing also noted in June 2023 that RPs had invested £13bn in acquiring new homes in the last year and were predicted to spend an additional £16.8bn on new homes in the next 12 months, all of this being separate investment alongside repairs and maintenance costs.
So even though we may see suppressed activity potentially in the first quarter of 2024, a consistent demand for both private homes and affordable housing is expected to be maintained in the medium to long term. This is supported by Glenigan’s renewed construction growth forecast at 8% for 2024 and 7% for 2025.
The prospect of a recovering economy and market stability will inevitably increase both consumer and business confidence, boosting the industry and allowing everyone to thrive in 2025.
Charlie Ash
Sector lead – housing associations
NHBC
